We have, for several years now, highlighted the significance of Mortgage Equity Withdrawal (MEW) in the U.S. as a major source of consumer spending.
As MEW slows, so too will consumer spending.
It turns out that this phenomena is not limited to the U.S.: In Great Britain, where nearly all mortgages are adjustable APRs, MEW has been a major source of fuel for their consumer spending.
From Monday’s WSJ:
"In the past decade, U.K. consumers have become more
dependent on borrowed money, both to buy homes and to finance spending.
As of July, total mortgage debt in the U.K. had reached £1.1 trillion
($2.2 trillion), more than double the level of 10 years earlier and
equivalent to more than 80% of annual gross domestic product. In the
first quarter of this year, U.K. homeowners tapped their home equity
for about £13.2 billion, or 6.1% of disposable income, an indication of
how much rising home prices have been raising consumer spending, which
makes up about two-thirds of the U.K. economy."
Of course, this only gets discussed once there is some sort of a disaster — and in the UK, that disaster is Northern Rock:
company symbolizes the borrowing boom better than Northern Rock. In the
late 1990s, the company became a pioneer in the securitization of U.K.
mortgage loans, packaging thousands of loans into pools and selling the
cash flows as securities to investors in the U.S. and Asia.
By tapping capital markets rather than relying solely on typical
deposits, Northern Rock was able to expand at great speed. By June, it
had about £87 billion in mortgage loans outstanding and had accounted
for almost a fifth of new mortgage loans made in the first half.
According to brokers, Northern Rock gained market share in part by
taking risks — allowing home buyers, for example, to get loans
covering as much as 90% of the purchase price.
Their mortgages "were prime, but they were operating at the outer limit
of it," said Howard Cook, a partner at Talbot Insurance Services, an
independent financial adviser in Cumbria, in northwestern England. A
Northern Rock spokesman said the credit quality of the company’s loans
was solid, and that the percentage of loans in arrears was well below
the industry average."
There you have it: Sub-prime mortgagees, high LTV, below industry average loan quality. Gee, how could that strategy ever go wrong?
Northern Rock May Point to U.K. Crunch
CARRICK MOLLENKAMP and MARK WHITEHOUSE
WSJ, September 24, 2007; Page A2
It went wrong because of greed and the profit motive. “Let’s make tons of money now, because we can, and dam the future stability of our company, our country and our world!”
hum – seems everyone in the west loves the products displayed on tv
MEWing to have that Better Home & Garden, pocket device, car
God bless them please for loving other peoples inventions so much
if we can just get that balance in standards of trade here
ps – failed to mention a thought blip in the noggin
leaches must stop –
money maneuvering and lawsuits that are only engaged in for personal profit
‘the needs of the many outweigh the needs of the few (one)’ – Mr Spock
The Dead Banker’s Society
The bailout only seems to have encouraged more risky behavior to boot…
From the Times Online:
“Northern Rock stands accused of “reckless” lending after it emerged this weekend that the beleaguered bank is still offering mortgages of six times salary to potential borrowers. Despite provoking the worst banking crisis for decades, the bank last week offered a reporter posing as a first-time buyer a £180,000 mortgage even though he had a salary of only £30,000.
The loan was at least £30,000 more than other leading lenders were prepared to offer. Repayments for the loan would have accounted for more than 60% of the fictional buyer’s take-home salary.
The reporter, posing as another potential customer, was also offered a so-called “negative equity mortgage” worth 117% of the value of the property he claimed to be interested in buying. The mortgages offered by other banks to the same potential borrower were significantly lower.”
Moral Hazard in a nutshell.
In the great age of transfered liability aka diversification of risk, everyone counts on everyone else taking the risk while they make a rip off of the transfer.
What happens when there is no left to be accountable?
I think we are seeing it right now. Everything grinds to a halt, and everyone points at everyone else.
I draw parallels from this to other societal problems, like how a generation of spineless cowards has been raised and taught to deny personal responsibility for everything.
Interestingly enough the Economist did a great worldwide survey in ’03 on the looming housing bubble and concentrated elsewhere than the US:
House of cards
May 29th 2003
From The Economist print edition
In many countries the stockmarket bubble has been replaced by a property-price bubble. Sooner or later it will burst, says Pam Woodall, our economics editor
For subscribers (unfortunately) the URL is:
the UK debt bubble far exceeds the US, and house prices have increased further, and faster, than the US ever did. and like you say, everyone is on adjustable-rate mortages (the vast majority take out deals that are fixed at low rates for the first 2 years, then float after that).
the disaster here is only just unfolding…anecdotal evidence of slightly falling prices, and the lowest rate of first-time buyers ever (ie. no support to the market).
once the economy starts slowing down, this housing bust is going to make the US one look like a blip.
Sell Sterling buy USD at some of the best levels in decades…above 2.00 just now, could easily drop to 1.30.
«Once the economy starts slowing down, this housing bust is going to make the US one look like a blip.
Sell Sterling buy USD at some of the best levels in decades…above 2.00 just now, could easily drop to 1.30.»
The UK government is engaged in an unpopular war and relies entirely on the votes of fully vested, entitled aging home owners. Home prices can only go up. The UK government unconditionally guaranteed all bank deposits at the first sign of loss of confidence in a mortgage lender.
I think that given the choice, the UK government will protect its voting base, like the USA politicians, by going for low interest rates and high inflation.
BTW the UK government goes for the same inflation hiding techniques as the USA government (and the same unemployment hiding ones), but at least it is kept slightly more honest as the UK trade unions have their own economists and they use the better indexes.
Why borrowing power is going too high, it’s really strange.